Last year we mused as to whether or not insurers would step in to close the gap left by banks in commercial real estate lending, and this year we are getting our answer in the positive. Legal and General has become the third large UK insurer to start a commercial property lending business, with a loan of £121m to Unite, the UK's largest developer and manager of student housing.
L&G first considered property lending last year, but pulled back as market conditions worsened. According to the insurer it had held negotiations with 150 prospective borrowers before finally closing the deal with Unite, which is to be followed in quick succession by another deal in the coming weeks if L&G gets its way.
Ashley Goldblatt, head of commercial lending at L&G Investment Management, said the company had looked at applications that could not get lending from the banks. "We looked at a lot, but you have to wait for the right one to come along and then grab it. It is a bit like marriage."
For its part in the marriage L&G is looking for borrowers looking to take on loans over medium-long term agreements and who are willing to negotiate a fixed-rate agreement as oppose to a floating one, which will allow L&G to match its long-term liabilities according to Goldblatt.
The Unite load represents 60% loan to value at a fixed 5.05% (well below the 5.7% average cost of Unite debt) over 10 years and is secured against Unites portfolio of student dormitories in London, Manchester and Bristol.
According to Joe Lister, Unite's chief financial officer, securing the loan was a testament to the strength of the company and marked an important step for it, but it is also likely a testament to the strength of student property in the UK.
Banks lost their appetite for commercial property lending during the financial crisis, but subsequent changes in lending regulations have made them pull back further, and new planned changes will force them even further back, especially Basel III, which is the third accord in a sequential updating of global banking regulation, and will require banks to hold higher capital against commercial property loans.
- Thursday 03 May 2012